Thai Union Group’s long-standing commitment to sustainability efforts helped persuade investors to accept an unusual step-up and step-down coupon structure for its inaugural Bt5bn (US$149.5m) seven-year 2.47% sustainability-linked bond – making it the first of its kind in the world.
The transaction was the first SLB sold in Thailand and involved several discussions with Thai investors to elaborate upon and explain not only the complexities of the sustainability-linked financing, but also the coupon adjustment combination.
The global seafood producer had raised an equivalent Bt12bn in February 2021 in its first sustainability-linked loan denominated in Japanese yen, US dollars and Thai baht. The SLL features a step-down in the margin if Thai Union meets a set of pre-determined sustainability performance targets or key performance indicators.
That structure formed the foundation of the bond offering, which was launched in July after Thailand’s Securities and Exchange Commission established its SLB regulations in May.
Thai Union was keen to offer only the step-down feature, but investors resisted the structure, prompting the issuer and its sole lead manager Bank of Ayudhya to engage anew and come up with a more appealing coupon adjustment mechanism.
The coupon will step down if Thai Union achieves its targets, but will step up if the targets are not achieved. The combination of a step-up and step-down met Thai Union’s goal to be rewarded with a margin reduction for its efforts to meet the targets, while also giving investors a pricing safety net in line with global SLBs.
The issuer faced another challenge – some fund managers could not invest if the coupon adjustments were perceived as derivative features. Clarification was sought from the SEC, which then ruled that the coupon revisions were not regarded as derivatives and that SLBs would be considered to be plain vanilla bonds, paving the way for the fund managers to invest.
Bookrunners gathered interest from anchor investors before the deal launched to ensure there was sufficient demand. The borrower indicated that it was targeting Bt4bn at guidance of 2.41%–2.51%. Investors piled in, pushing the order book to Bt8.9bn, and allowing the deal to price at 2.47% with an upsize to Bt5bn.
The transaction’s success paved the way for another Thai borrower, Indorama Ventures, to sell a Bt6bn SLB in October.
While global bond investors have balked at step-downs in SLBs, Thai Union’s deal achieved remarkable acceptance from major Thai investors, demonstrating their belief in the company’s commitment to improve sustainability over the long term.
Bank of Ayudhya was sole lead manager for the bond offering as well as sustainability-linked bond structuring adviser with MUFG Securities Asia.
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